patent trolls - an overview of proposed legislation and a

PATENT TROLLS-AN OVERVIEW OFPROPOSED LEGISLATION AND A

SOLUTION THAT BENEFITS SMALLBUSINESSES AND ENTREPRENEURS

ADAM SMITH*

I. INTRODUCTION

At the very inception of the United States the Founding Fathersunderstood the importance of, and need for, a strong patent protectionsystem by providing in the Constitution that, "[t]he Congress shall havepower ... [t]o promote the progress of science and useful arts, by securingfor limited times to authors and inventors the exclusive right to theirrespective writings and discoveries."' Patents and intellectual propertyportfolios have become the lifeblood of many organizations thanks tostrong patent rights.2 Patent rights have helped to foster the innovation andefficiency that has made the American economy strong. Lately, the rise ofcertain patent-assertion entities, colloquially termed "patent trolls," hasrenewed discussion on the proper balance and means of granting andenforcing patent rights. These patent trolls have inspired spiritedconversations on many levels, from the halls of the White House4 to theback room of the neighborhood store, about the state and effectiveness ofthe current patent law. These conversations have weighty implications.Recent studies have estimated patent trolls as accounting for at least$30,000,000,000 in settlement and licensing fees annually.5 This number"has increased fourfold" from 2003-2013 and continues to rise.6 The White

J.D. Candidate, The Ohio State University Moritz College of Law, Class of 2015.U.S. CONST. art. I, § 8 cl. 8.2 See U.S. Chamber of Commerce, Why are Intellectual Property Rights

Important?, GLOBAL INTELL. PROP. CENTER (Dec. 28, 2014),http://www.theglobalipcenter.com/why-are-intellectual-property-rights-important/.3Id.4 See generally Gene Sperling, Taking on Patent Trolls to Protect AmericanInnovation, WHrrE HOUSE BLOG (June 4, 2013, 1:55 PM),http://www.whitehouse.gov/blog/2013/06/04/taking-patent-trolls-protect-american-innovation; see also Press Release, Off. of Press Sec'y, Fact Sheet -ExecutiveActions: Answering the President's Call to Strengthen Our Patent System andFoster Innovation (Feb. 20, 2014), available at http://www.whitehouse.gov/the-press-office/2014/02/20/fact-sheet-executive-actions-answering-president-s-call-strengthen-our-p.5 Joel B. Carter, Responding to a Patent Troll's Threats, ARK. LAW., Summer2013, at 30.6 Id. But see Pamela Maclean, Uptick in Patent Litigation Not Caused by 'Trolls ':Study, REUTERS LEGAL, Nov. 19, 2013 (on file with the publisher).

202 THE OHIO STATE ENTREPRENEURIAL Vol. 9.1BUSINESS LA WJOURNAL

House estimates that over 100,000 companies were threatened by patenttrolls in 2012 alone.

This Note seeks to explain the patent troll problem and present acomprehensive solution. The Note begins by outlining the definition of apatent troll in Part II. This definition distinguishes other patent assertionentities and explains why the patent troll problem is limited to the kindsmore precisely termed Trolling Patent Trolls (TPTs). The Note thendiscusses the negative effects that TPTs have on society, particularly onsmall businesses and entrepreneurs. Part III seeks to explain the relevantchanges at the United States Patent and Trademark Office (USPTO) underthe new federal patent act (the America Invents Act) that improve thequality of issued patents. These improvements affect the practice of TPTsby reducing the availability of vague and ambiguous patents that TPTsassert. In Part IV, this Note provides an overview of some recentlyproposed legislation aimed at disrupting the TPTs' business model anddiscusses their advantages and weaknesses. Finally, in Part V, this Noteproposes a balanced, comprehensive and multifaceted solution to the TPTproblem: a combination of legislative and judicial reforms with privateactions that will significantly reduce the TPTs' practice by providingindividuals and entities with the proper incentives, means and mechanismsfor fighting TPTs.

II. THE (TROLLING) PATENT TROLL PROBLEM

A. Definitions and Types of Patent Assertion Entities

Credit for coining the term "patent troll" is given to Peter Detkin,former Assistant General Counsel for Intel, who came up with the termafter he was sued for defamation for using the term "patent extortionists" todescribe an opposing party.8 Detkin defines a patent toll as "somebody whotries to make a lot of money off a patent that they are not practicing andhave no intention of practicing and in most cases never practiced." 9

Reminiscent of Justice Stewart's infamous definition of pornography, "Iknow it when I see it,"' an exact definition for a TPT is a highly contestedmatter and often involves the gut reaction of an experienced party. This isparticularly true because some entities blur the line between patent assertionentity and TPT or practice a bit of both." The elusive nature of a concrete

7 Sperling, supra note 4.8 Brenda Sandburg, You May Not Have a Choice. Trolling for Dollars, PatentEnforcers Are Scaring Corporate America, and They Are Getting Rich - Very Rich- Doing It, RECoRDER, July 30, 2001, at 1.9 Id.10 Jacobellis v. Ohio, 378 U.S. 184, 197 (1964) (Stewart J., concurring).1 "See, e.g., Joe Mullin, Uber-troll Intellectual Ventures Faces Motorola in FirstPatent Trial, Three Patents, Two Low-profile Inventors, One Jury, ARS TECHNiCA

(Jan. 24, 2014, 11:15 AM), http://arstechnica.com/tech-policy/2014/01/uber-troll-intellectual-ventures-faces-motorola-in-first-patent-trial/.

2014 Patent Trolls-An Overview of Proposed Legislation 203and a Solution that Benefits Small Businesses and Entrepreneurs

TPT definition at least partially contributes to the continued difficulty incrafting acceptable legislation to counter the effects of TPTs.' 2 Many of thecommonly used patent troll definitions focus on whether or not the entitypractices the patent.13 This results in the labeling of entities, such asuniversities and research institutions, that do not generate the public costs aTPT does and that many are unlikely to view as deserving of the label.' 4

Even the definition by the Intellectual Property Owners Association, whilemore appropriately narrow, is still vague: "trolls are not themselvesinventors, but are always lawyers or investors who acquire paper patentsfrom insolvent individuals or companies at fire-sale prices."' 5 As this is anarea of developing definitions and renewed focus, these terms anddefinitions continue to change.

Due to a developing and often overly broad TPT definition, manyentities are included in the current TPT definition that might not fit thedefinition of a true TPT. There are three main types of trolls: inside trolls,heat seeking trolls, and "regular" TPTs.16 "Inside trolls: are entities thatactually do produce a product, but often do not practice (i.e., do not produceor manufacture the invention disclosed in their patents) on all, or even most,of the patents in their portfolio. 17 These entities patent items they do notspecifically produce in order to prevent competition in their productionspace.' 8 By excluding competitors, these entities may continue profitableproduction of their practiced-on patented products. "Heat seeking trolls" arenon-producing entities that buy up patents from other institutions or have anagreement with practicing entities to use their patents and assert themagainst infringing entities via litigation.19 Heat seeking trolls often includelaw firms or intellectual property groups licensed by universities who asserttheir client's patent rights against infringers for a flat fee or sometimes evenon a commission basis. 20 Finally, "regular" TPTs are institutions thattypically buy up a number of old, inexpensive, vague and likely invalidpatents to assert against a large pool of weak targets via threatening lettersand license demands, but rarely assert their patents via litigation.2'

12 See Ashley Chuang, Note, Fixing the Failures of Software Patent Protection:

Deterring Patent Trolling by Appling Industry-specific Patentability Standards, 16S. CAL. INTERDISC. L.J. 215, 218 (2006)."aId at 219.14 Id.

15 Victoria E. Luxardo, Comment, Towards a Solution to the Problem of

Illegitimate Patent Enforcement Practices in the United States: An EquitableAffirmative Defense of "Fair Use" in Patent, 20 EMORY INT'L L. REV. 791, 793-94(2006) (citations omitted).6 Carter, supra note 5.171d

18Id.191d.20 See id.21 id


Regular TPTs are the institutions that individuals typically think ofas the "true" patent trolls. Before explaining why TPTs are really the true"bad guys," a brief discussion of why other types of patent trolls do notdeserve a similar label is warranted. Inside trolls are often necessary for thesurvival of an entity.22 Not every variant, improvement or related inventionto the practiced-on patent will likely be produced, even if that variant ideais patented. This may be because entities need to clear space for theirinvention to survive or because the idea was patented before the entity isable to determine whether production is profitable. A party who comes upwith a new idea will likely patent every patentable embodiment of that ideathey can conceptualize, and sometimes that means taking out more than onepatent. Indeed, entities often require the protection of a provisional or non-provisional patent before they are able to perform the necessary marketresearch, investor fundraising or commercialization research to determinethe profitability of a patented invention. Alternatively, an idea could beinitially promising, but later found unworkable due to regulatory, liabilityor manufacturing cost concerns, to name a few possible reasons.

For a hypothetical example, imagine a doctor who comes up with acure for the common cold. The inventor might patent the drug in apowdered form for pills, in a liquid form for swallowing and a differentliquid form for intravenous injection. The inventor may find that the drug ismost popular in the pill form because it tastes bad in a liquid and mostpeople do not care for shots. The inventor, having spent millions inventingthe cure, would likely still enforce his liquid and intravenous form patentsagainst other manufacturers. Otherwise, the inventor may not be able torecoup all of his costs and make an adequate profit. Without theseincentives, the inventor may not have spent the time and energy to developa cure and the world would lose out on the benefit.

Heat seeking trolls can provide economically beneficial liquidityand revaluation for patents available on the market by buying out patentrights.23 Like other commodities, the more patents are bought, sold orlicensed, the more accurate the market price. In fact, many universities andresearch institutions use heat seeking patent trolls essentially as outsourcedpatent enforcers, hiring them to enforce their patent rights againstinfringers.24 Additionally, as some heat seeking trolls work oncommission, they may provide the only financially viable means for anentity, particularly a small business or entrepreneur who has fewerresources, to enforce their patent rights.

22 See id.23 See id.24 Peter Lee, Patents and the University, 63 DuKE L.J. 1, 43-44 (2013).25 Id.


Regular TPTs have few, if any, of these redeeming qualities.2 6 Atleast one commentator analogized TPTs to blackmail, a market thatrequired judicial and legislative action to shut down.27 This commentatornoted that the simple presence of willing buyers and sellers does not equatewith social welfare. 28 TPTs do not produce anything or come up with anynew ideas because they simply purchase already-available patents with nointent to produce.29 Further, they do not provide significant liquidity orrevaluing because they choose their buying, selling and licensing fees basedon the transactional costs of litigation, not on the value of the patent.3 °

Additionally, many of the asserted patents are ones that, if litigated, wouldlikely be found invalid. These patents are asserted against a multitude ofindividuals and entities, many of whom would be found not to be infringingthe asserted patents if they chose to challenge the infringement claim.3'This has a net effect of TPTs making large sums of money from innocentparties that could otherwise be spent on things like growth, research anddevelopment, and job creation. TPTs have made a viable and often verylucrative business from this practice.32

B. An Overview of the TPT Problem-Why TPTs Exist

TPTs are able to exploit their business niche for many reasons.First, many potentially invalid patents are approved by the USPTO everyyear.33 Even if valid, these patents often have an overly broad scope thatallows the holder to sue a larger number of individuals or entities than is

26 See generally T.J. Chiang, What is a Troll Patent and Why Are They Bad?,PATENTLY-O (Mar. 6, 2009), http://www.patentlyo.com/patent/2009/03/what-is-a-troll-patent-and-why-are-they-bad.html; Brian J. Love & James C. Yoon, Article:Expanding Patent Law's Customer Suit Exception, 93 B.U. L. REv. 1605, 1609-10(2013).

One thing that is not seriously debated, however, is the harmcaused by patent holders that specialize in nuisance-value patentlitigation. No one champions these "bottom feeders" of the NPEecosystem: a class of patentees that overwhelmingly acquire old,extremely weak patents and assert them against the numerous,unsophisticated purchasers (rather than manufacturers) ofallegedly infringing products in suits that typically settle for lessthan defendants' anticipated litigation costs.

Id.27 Robert P. Merges, The Trouble with Trolls: Innovation, Rent-Seeking, and PatentLaw Reform, 24 BERKELEY TECH. L.J. 1583 (2009).28 See generally id.29 Id. at 1599.30 See id. at 1600.3 1See id. at 1610.32 See discussion infra Part II.B.33 Benjamin J. Bradford & Sandra J. Durkin, A Proposal for Mandatory PatentReexaminations, 52 IDEA 135, 136 (2012) ("The patents licensed and enforced byNPEs or patent trolls are often considered 'bad patents' because of the likelihoodthat they are invalid and were only issued because the U.S. Patent and TrademarkOffice .. ").


actually warranted by the prior art, and contains vague or ambiguouslanguage that fails to put the USPTO examiners, potential defendants,34

judges and juries on notice as to what exactly the patent covers.35 Finally,challenging TPTs represents a classic "free rider" problem-one personmay expend the time and resources required to invalidate a patent or have atechnology declared not infringing, but the entire class of individualsaffected by the asserted patent gets to free ride on the judgment and nolonger needs to be concerned about the TPTs' threats.

While the asserted patents may be found invalid if litigated, patentinfringement claims are infrequently made because of the significanttransactional costs of defending an infringement claim or obtaining aninvalidity judgment. The hefty legal expenses involved in litigating a patentare approximately $1,000,000 just to get to discovery and over $2,000,000to get to a decision on the merits.36 TPTs are aware of these significanttransactional costs and agree to settle their claims with the potentialdefendant via an exclusive license for a value below the litigation costthreshold, but large enough to be significant ($20,000 to $100,000 is notunusual).37 As these license fees are extracted via patents that are likelyinvalid or not infringing, many equate the TPT practice to a modem dayshake down. Patent attorneys are also aware of these problems and oftenfeel forced to encourage their clients to simply pay the licensing fee.38

A typical TPT business model takes advantage of potentiallitigation costs to dissuade patent owners from defending against the claim.This pushes potential defendants into a position where they are incentivizedto simply pay the licensing fee without much contest. Therefore, TPTsrarely actually litigate patents. As such, if potential defendants can identifythat they are dealing with a known TPT, they may elect to take a calculatedrisk and avoid the licensing fee by fighting the case until the TPT drops it,or by simply failing to respond to the TPTs' threats all together.39 Further,the allegedly infringing technologies threatened by the TPT are typicallynot central to that party's business (e.g., Wi-Fi patents asserted against acoffee shops that offers Wi-Fi for its guests or networked printer-scanner-copier patents asserted against a real estate office), so potential defendantsare unlikely to be well versed in intellectual property matters (i.e., they areeasily frightened or intimidated into a lawsuit) and are unlikely to be highlyinvested in the outcome. Thus, these businesses are not highly incentivized

34 For the purposes of this Note, "potential defendants" refers to the partiesthreatened by trolling patent trolls who theoretically could be defendants in aninfringement action.35 Bradford & Durkin, supra note 33, at 137.36 See Caroline Coker Coursey, Battling the Patent Troll: Tips for DefendingPatent Infringement Claims by Non-manufacturing Patentees, 33 AM. J. TRIALADvoc. 237, 241 (2009).37 See generally id.38id39 id.


to invest their resources into a non-infringing or invalidity declaration.Unfortunately, this is not the only issue.

Another important part of this problem is that TPTs typically goafter a large number of individual defendants who must each litigate thematter separately, as opposed to going after a manufacturer or productprovider who has the incentive to litigate on behalf of its current and futurecustomers.4 In fact, it is common practice for the threatening letters sent byTPTs to explicitly state that they are not going to sue manufacturers orproduct providers in the hopes of keeping out these parties who might havethe incentives and resources to fight the TPT.41 Further, these potentialdefendants are generally spread geographically and do not know eachother.42 Even if they had the desire to somehow pool their resources, it isunclear if they are even able to identify each other or legally permitted topool their resources.43 In any matter, the logistics would likely prevent suchcollaborative action.44 It is also difficult for these potential defendants toknow if they are dealing with a TPT or a different type of patent assertioninstitution because TPTs work to obfuscate their true identity, typically byoperating through a complex series of shell companies.45 These shellcompanies serve not only to disguise the real party in interest in the lawsuit,but also to shield and limit the TPT's assets from liability.46

The result is that these patents are rarely challenged, even if theyare invalid or the potential defendant is not infringing. A few companieshave taken a stand against these infringement threats. Newegg is aprominent example. It has chosen to fight TPTs based on ethical reasonsand the idea that fighting will result in the long-term benefit of not beingthreatened by other TPTs who will realize that they are in for a battle, onethat could ruin their business model with an invalidity or non-infringement

47declaratory judgment. Newegg and other similar companies have taken apublic stand that they will fight all entities they see as TPTs, and they have

40 See J.P. Mello, Technology Licensing and Patent Trolls, 12 B.U. J. SCI. & TECH.

L. 388, 394 (2006).41id.42 See id43 See id. at 397.44id45 See generally Tom Ewing & Robin Feldman, The Giants Among Us, 2012 STAN.TECH. L. REv. 1 (2012).46 See generally id.47 See generally Julie Knudson, When the Patent Trolls Come Knocking NewEggcalls in Lee Cheng, PROFILE (Oct.-Dec. 2013),http://profilemagazine.com/2013/newegg/; Joe Mullin, Newegg Hurtles TowardTexas Showdown with Famed "Patent Troll", ARS TECHNICA (Nov. 18, 2013, 9:30AM) [hereinafter Texas Showdown ], http://arstechnica.com/tech-policy/2013/1 1/newegg-hurtles-toward-texas-showdown-with-famed-patent-troll/;Joe Mullin, "Shopping Cart" Patent Troll Tries to Save Itself, Gets Pounded byNewegg, ARS TECHNICA (Sept. 6, 2013, 3:45 PM) [hereinafter "Shopping Cart"Patent Troll ], http://arstechnica.com/tech-policy/2013/09/shopping-cart-patent-troll-tries-to-save-itself-gets-pounded-by-newegg/.


done so against some of the nation's largest and best-funded ones.48 Theseinclude suits against TPTs asserting patents on online shopping carts49 andpublic encryption-which are some of the most widely asserted patents inhistory.50 Newegg cannot fight all the TPT battles, however. The high costsof time, money and energy, tricky logistics, uncertainty of litigation and thefree rider effect often prove too much for companies and they, rationally,choose simply to settle for a licensing fee.51 As a result, many lawmakershave begun an earnest search for a solution that eases the burden oflitigating against TPTs.

C. TPTs Have a Significant Negative Effect on Small Businesses andEntrepreneurs

TPTs often target small and entrepreneurial businesses due to theirrelatively smaller assets, lack of experience and fear of legal action.52

Numerous news articles detail the exploitation by TPTs, particularly thosewho prey on small and entrepreneurial businesses. One such example is aTPT that bought several patents related to wireless technology andproceeded to send mass threatening letters targeting franchised hotels,coffee shops, stores and restaurants.53 The TPT sent letters threateninglitigation, but providing the alleged offenders with the option of droppingcharges in exchange for a $2,300 to $5,000 licensing fee.54 Presumably, theTPTs target these small business owners because the owners have sufficientassets to pay the licensing fee, but lack the experience and resources to fightthe infringement claim.55 More importantly, these small businesses lack theincentives and desire to risk losing an invalidity or non-infringementdeclaratory judgment proceeding, or even worse, to be found to actually beinfringing and forced to pay potentially hefty damages.56

In a similar story, a TPT law firm bought a portfolio of patentsrelated to networked printer-scanner-copier combination devices.57 These

48 See Knudson, supra note 47.49 See, e.g., "Shopping Cart" Patent Troll, supra note 47.50 Texas Showdown, supra note 4751 Knudson, supra note 47; see also Texas Showdown, supra note 47 (The Jones

patent litigation involving five years of litigation, "hundreds" of lawsuits, "tens ofmillions" of dollars in payments, a still unclear result.).52 See Chuang, supra note 12, at 231-232.53 Mike Masnick, Patent Troll Says Anyone Using WiFi Infringes; Won't SueIndividuals 'at this Stage', TECHDIRT (Oct. 3, 2011, 11:28 AM),http://www.techdirt.com/blog/wireless/articles/20111001/00365416161/patent-troll-says-anyone-using-wifi-infringes-wont-sue-individuals-this-stage.shtml.54

Id.

55 Id.56 See id.57 Steve Salzberg, Did You Scan and Email That Document? You Might Owe $1000to a Patent Troll, FORBES (Aug. 5, 2013, 8:00 AM),http://www.forbes.com/sites/stevensalzberg/2013/08/05/did-you-scan-and-email-that-document-you-might-owe- 1000-to-a-patent-troll!.


devices, which are used in most homes and businesses, allow a user to scana document and send it to a networked computer.58 The TPT law firmproceeded to send out mass threatening letters offering a $1,000 licensingfee to avoid litigation, particularly to small businesses.59 Numerous otherstories repeat essentially the same theme across a variety of smallbusinesses and technologies.60

The issue of TPTs is one that has plagued small businesses andentrepreneurs for some time now, increasingly so in recent years.6 1 As theTPT problem continues to rise, the conversation around TPTs has grownincreasingly urgent as businesspersons continue to demand solutions to thegrowing problem. In the subsequent parts, this Note seeks to explain therelevant changes under the new America Invents Act patent legislation thataffect the practice of TPTs, overview some of the proposed TPT legislationand propose a multi-faceted solution to the TPT problem.

III. THE BATTLE FOR BETTER PATENTS AT THE USPTO ANDIMPROVEMENTS MADE BY THE AMERICA INVENTS ACT

As previously discussed, TPTs operate by accumulating overlybroad, vague, confusing and likely invalid patents that cover largetechnological areas and often fail to put the examiner and potentialdefendant on sufficient notice as to what the patent covers.62 Many point tothe USPTO as a major source of this problem and blame the lack of USPTOresources for the issuance of poor-quality patents.63 The lack of resources atthe USPTO is a legitimate concern, but it is one that is outside the scope of

58 Id,59

Id.60 See Love & Yoon, supra note 26, at 610-11.

Recent years have seen a spike in high-profile patent assertion ofthis sort. In the last two years, NPE Innovatio[n] has asserted itspatent rights - rights the company alleges cover any use of a Wi-Fi network - against hundreds of small businesses like coffeeshops and hotels that offer wireless network access to patrons...mobile applications that enable users to make purchases onmobile devices ... NPE Project Paperless has threatened to suean untold number of small offices for infringing patents thatallegedly cover copiers equipped to email scanned files . . .Personal Audio has similarly threatened end users of podcastingsoftware. Entities like PJC Logistics and ArrivalStar have suedover 600 trucking companies, private auto fleet owners, andpublic bus and rail authorities that use GPS devices to track theirvehicles.

Id.; see also Victoria Finkle, Why Patent Reform Matters to Banks, AMERICANBANKER (Dec. 6, 2013, 2:06 PM),http://www.americanbanker.com/issues/178_234/why-patent-reform-matters-to-banks-1064106-1.html (explaining the impact of patent trolls on banks).61 Bradford & Durkin, supra note 33, at 138-41; Sperling, supra note 4.62 Sperling, supra note 4.63 Bradford & Durkin, supra note 33, at 138-41.

210 THE OHIO STATE ENTREPRENEURIAL Vol. 9.1BUSINESS LAWJOURNAL

this Note. What is likely the largest and most significant piece of patentlegislation in recent history was signed into law on September 16, 2011, theLeahy-Smith America Invents Act (the America Invents Act or AIA). 64 TheAIA made many notable changes to U.S. patent law, fundamentallychanging it from a "first-to-invent" to a "first-to-file" system.61 Otherimportant changes allow for greater access to the USPTO, and particularlyto its post-issuance review and challenge processes, for smaller entities andindividuals who are interested parties.66 Those changes will likely prove tohave a lasting effect on the quality of the patents issued from the USPTO.These positive changes will have a long-term deterrent effect on TPTs byreducing the number of vague, confusing, and likely invalid patents issued.As the vague and confusing patents available now continue to expire, theywill no longer be available in the market place, and therefore will not beavailable for TPTs to assert. This has the added benefit of relativelyincreasing the number of valid and clear patents in the market, whichimproves the faith in the USPTO, U.S. patent law and the judicial system.Some of these changes include the implementation of derivativeproceedings, revised post-grant review, the addition of the inter partesreview proceedings and the alteration of the fee schedule to include reducedfees for small and micro entities. Each of these items will be discussed inturn.

A. Derivative Proceedings-the New System for the AIA 's First-to-file System

Derivative proceedings allow an alleged inventor to contest theissuance of a patent if he believes that he is in fact the true inventor, orbelieves that the challenged invention is a mere derivative of their existinginvention.67 This proceeding replaces the interferences proceeding under theold patent system (i.e., pre-AIA), where an alleged inventor could assertthat he invented the claimed invention first. As the AIA has moved theUnited States into a first-to-file system, the party who invents first nolonger matters. However, true and valid inventorship remains an importantrequirement for a valid patent to be issued. This new derivative proceedingcontinues to help ensure that the patents issued by the USPTO are valid bygiving other interested parties the opportunity to assert their inventorship ofthe claimed invention. Further, the "mere derivative" aspect of thederivative proceeding allows an inventor to challenge a patent that is the

64 See generally Leahy-Smith America Invents Act, H.R. 1249, 112th Cong., (1 stSess. 2011) (enacted).65 See generally id.66 See generally id.61 See 35 U.S.C. § 135(b) (Supp. V 2011) ("In a derivation proceeding institutedunder subsection (a), the Patent Trial and Appeal Board shall determine whether aninventor named in the earlier application derived the claimed invention from aninventor named in the petitioner's application and, without authorization, the earlierapplication claiming such invention was filed.").


same or substantially the same (i.e., patentably indistinct) as the claimed68invention. 68 This new proceeding is cheaper than the old interference

proceeding and thus more accessible to small businesses and entrepreneurswho typically have fewer assets than large entity filers, such ascorporations.69

B. Post-grant Review Remains Helpful, but Largely Unchanged

Post-grant review is a process whereby anyone can challenge thevalidity of a patent that has been recently issued.7° This process allowsinterested parties to help ensure that accurate and valid patents are issued bythe USPTO by permitting these parties, who naturally have an incentive tochallenge a patent's validity, to present their arguments before the USPTO.Post-grant review has not seen many changes under the AIA, but itscontinued presence is a vital part of ensuring that only high-quality patentsare issued from the USPTO. The post-grant review procedure allows aperson to challenge the validity of the patent on any potentially invalidatinggrounds.7' The person can challenge the validity of the patent by submittingany prior art that bears on the patentability of any claim or statement by theinventor related to the scope of the invention.72 The challenge will beallowed if it is more likely than not that a claim will be invalid or thechallenge will resolve an important, novel or unsettled legal question.73 Theburden of proof for invalidation under these proceedings is on thechallenger, who must prove invalidity by a preponderance of theevidence. 74 While the cost of post-grant review is not trivial (starting at$35,800 in filing fees and rising sharply based on the number of challengedclaims, not including attorney's fees), it is still typically much more cost-effective than traditional litigation.75

While post-grant review is a helpful mechanism, it does have itsshortcomings. First, the challenge must be filed within nine months of the

68 See Gene Quinn, First Inventor to File: UPSTO Derivative Proceedings Go

Final, IP WATCHDOG (Sept. 10, 2012, 11:26 AM),http://www.ipwatchdog.com/2012/09/1 0/first-inventor-to-file-uspto-derivation-proceedings-go-final/id=27986/.9 Richard G. Braun, America Invents Act: First-to-File and a Race to the Patent

OfTce, 8 OHIO ST. ENTREPREN. BUS. L.J. 47, 49 (2013).Eugene T. Perez, Post-Grant Review, POST GRANT PROCEEDINGS,

http://www.postgrantproceedings.com/patent-modification/post-grant-review.htmlblast visited Apr. 6, 2014).1 Jeffrey C. Parry, Preemptive Strike.: New Third Party Patent Review Procedures

Via the America Invents Act, 55 ADvoC. 18, 19 (2012).72 Id.73 Chad M. Rink, Post-Grant Review and Inter Partes Review, POST GRANT

PROCEEDINGS, http://www.postgrantproceedings.com/topics/article-CMRPGRIPR.html (last visited Apr. 6, 2014).74 Id.75 Parry, supra note 71.


publication of the patent or patent application in question.76 Potentialdefendants of TPTs are seldom targeted so early in the life of a patent.77

Most TPTs do not even acquire a patent until after the patent has beenissued for several years.78 Secondly, post-grant review challenges trigger anestoppel effect. 79 This means that a party will be bound by the judgmentmade and estopped from arguing the merits that were raised, or reasonablycould have been raised, on appeal to the district or circuit court.80 Thisbroad estoppel effect often makes litigators hesitant to invoke thisproceeding since they cannot relitigate the issue later should their challengefail. Relatedly, proceedings at the USPTO are generally less formal andregulated than at the district or circuit court levels, as required to meet theirgoals of being faster and cheaper than traditional litigation. Somepractitioners fear that this less formal setting might not give proper weightto their arguments and result in less thorough scrutiny of the challengedpatent. This informality coupled with the estoppel effect deters somepractitioners from recommending post-grant review to their clients.

C. Inter Partes Review-the Crown Jewel of New Review Procedures

The inter partes review process is a new procedure implemented bythe AIA that replaces and greatly improves upon the inter partesreexamination procedure.8' Like post-grant review and inter partesreexamination, this proceeding allows for interested parties to help ensurethat accurate and valid patents are issued by the USPTO. This has the long-run effect of discouraging TPTs by limiting the availability of potentiallyinvalid or murky patents. This new procedure fills the gap after post-grantreview, allowing challenges to the validity of a patent after nine monthsfrom issuance.

82

Like post-grant review and inter partes reexamination, inter partesreview allows a person to challenge the validity of the patent on anypotentially invalidating grounds.83 The person can challenge the validityunder 35 U.S.C. §§ 102 (anticipation) or 103 (obviousness).84 The

76 id.77 See, e.g., Jeff John Roberts, Troll Sues New York Times with 1998 Patent fromHolocaust Group, GIGAOM (Oct. 22, 2013, 12:37 PM),http://gigaom.com/2013/10/22/troll-sues-new-york-times-with-1998-patent-firom-holocaust-group/.78 id.79 Rink, supra note 73.80 id.81 Id. See generally IPX vs. IPR, A Cheat Sheet, STERNE, KESSLER, GOLDSTEIN &Fox, PLLC (2012),http://www.skgf.com/uploads/29/doc/InterPartesReexamination-vs._InterPartes

Review.pdf.2 Inter Partes Review, FISH & RICHARDSON POST-GRANT REVIEW,

http://fishpostgrant.com/inter-partes-review (last visited Mar. 31, 2014).83 Id.84 Rink, supra note 73.


challenge will be allowed if there is a reasonable likelihood that petitionerwill prevail.8 ' The burden of proof for invalidation under these proceedingsis on the challenger who must prove invalidity by a preponderance of theevidence.86 While the cost of inter partes review is not trivial (starting at$27,200 in filing fees and rising sharply based on the number of challengedclaims, not including attorney's fees), it is still typically much more costeffective than traditional litigation.87

The interpartes review procedure corrects many of the deficienciesof the inter partes reexamination procedures. While the inter partes reviewprocess is more expensive, it is more thorough, expedited and settlementfriendly. It is more settlement friendly because settlements do not trigger anestoppel effect.88 The review is expedited; it is down to eighteen monthsfrom the thirty-six months. 89 For thoroughness, inter partes review includesa discovery process, an oral argument and the review is performed by amore experienced, higher-authority board than its predecessor. 90 Theseimprovements result in better opinions and provide the review more weightin subsequent legal proceedings.

Inter partes review still has similar estoppel effects and informalityconcerns as compared to post-grant review. However, the first full decisionon the merits of an inter partes review petition has been handed down bythe USPTO in Garmin International, Inc. v. Cuozzo Speed Technologies,LLC.91 The fact that a major company like Garmin decided to utilize interpartes review suggests that the advantages of inter partes review mayoutweigh the risks.92 In this case, Garmin petitioned against Cuozzo SpeedTechnology over a speed limit indicator used in conjunction with their GPSunits that provides a signal to the driver when the vehicle is exceeding thespeed limit.93 The court sided with Garmin and invalidated Cuozzo'spatent.94

Perhaps most importantly, the decision to cancel the claims wasbased on an obviousness combination of four patents, which is more thanthe two or sometimes three patents that district courts typically entertain.95

This suggests that petitioners may be able to win on more factually complexsituations at the administrative level with proceedings involving interpartes review, where the arguments are made before administrative judges

85 id.86 id.87 PX vs. IPR, A Cheat Sheet, supra note 81.88 id.89 id.90 Id.

91 Dennis Crouch, A First IPR Decision on the Merits, PATENTLY-O (Nov. 14,2013), http://www.patentlyo.com/patent/2013/1 1/first-ipr-decision.html.92 See id.93 Id.94 Id.95 Id.


who all have technical backgrounds, than in the district or circuit courts.96

This is significant because the factual findings in administrative hearingsoften benefit from a "substantial evidence" standard in the district or federalcircuit courts, or even a "clear and convincing" standard in somecircumstances. 9 Therefore, if a petitioner can be successful at the lesscostly and less time consuming administrative level via inter partes review,that petitioner will likely be entitled to some level of deference at thedistrict court or circuit court levels. Thus, inter partes review may be anadvantageous strategic choice for parties interested in declaring a thirdparty's patent invalid.

D. The Addition of Micro Entities to the Fee Schedule is a HelpfulStep

The AIA has also implemented a new, enhanced equity-based feeschedule. This new fee schedule separates institutions into large, small andmicro entities; the micro entity is a new addition under the AlA.98 A "large"entity is defined as any entity that is not a "small" or "micro" entity.99 Asmall entity is essentially one that has not assigned its rights to a largeentity, has 500 or fewer employees or is a non-profit organization.'00 Amicro entity is essentially an entity that has filed less than four patents, hadan income in the previous year of less than three times the median U.S.income and that has not assigned its patent to someone with an income inthe previous year of more than three times the median U.S. income. 10'Generally, a small entity's fees are half of a large entity's fees, and a microentity's fees are half of a small entity's fees (i.e., a quarter of a largeentity's fees). 10 2 These reductions are equally applicable for theaforementioned review methods, thus lowering the barrier to entry for smallbusinesses and entrepreneurs, those often most affected by TPTs, tochallenge a patent's validity by initiating any of the above reviews.

E. The Repeal of Joinder in Infringement Suits

As part of the AIA, an anti-joinder provision was enacted. Underthe previous patent laws, a plaintiff could join a group of defendants solely

96 id.97 Robert M. Asher, Inter Partes Review: The New Markman Hearing?, AM. B.ASS'N (Feb. 20, 2012),http://apps.americanbar.org/litigation/committees/intellectua/articles/winter20 12-inter-partes-review-markman-hearing.html.98 Current Fee Schedule, USPTO,http://www.uspto.gov/web/offices/ac/qs/ope/fee03l9l3.htm (last revised Mar. 13,2014).99 Leahy-Smith America Invents Act, H.R. 1249, 112th Cong., (lst Sess. 2011)enacted).'0 13 C.F.R. § 121.802 (2014).

101 Id.102 See Current Fee Schedule, supra note 98.


because they were all accused of infringing the same patent. 10 3 Under theAIA, plaintiffs can no longer join alleged defendants solely under thistheory.1 4 The idea behind this provision is to increase the burden on TPTsto initiate litigation, making litigation more costly and time consuming forthe TPT and thus discouraging TPT litigation. 0 5 This provision, whilehelpful, does not do enough to discourage trolls. Though it does make itmore burdensome for TPTs to pursue litigation, many TPTs base theirbusiness model on either never, or very rarely, pursuing litigation. Rather,these TPTs generally gather their licensing fees simply by sendingthreatening letters. Therefore, the parties that this provision is most likely toimpact are the other types of patent assertion entities that actually provide abeneficial market action.

The AIA takes many steps towards improving the quality of patentsthat are issued by the USPTO, particularly by providing improvedprocesses that involve interested third parties, allowing these parties toargue and challenge the merits of a patent at all stages of a patent's life viarevising derivation proceedings and post-grant review and implementinginter partes review and micro entity fees. Again, as these processescontinue to improve issued patents, a higher percentage of issued patentswill be valid and clear. Over time, the overly broad, vague, confusing andlikely invalid patents will expire and be replaced by these clear and validpatents. Thus, the aggregate effect of improving patent quality has the long-term effect of reducing the number of murky patents available to TPTs.These steps, which provide lower-cost alternatives to traditional litigation,have a significant impact on small businesses and entrepreneurs who arefrequently the target of a TPT's threats.

IV. PROPOSED LEGISLATION IS HELPFUL, BUT DOES NOTADEQUATELY SOLVE THE TPT PROBLEM

Due to the increased conversation and political pressure on theissue of TPTs, a remarkably high amount of legislation has been proposedrecently. 10 6 The problem of TPTs is complex and involves balancing manyfactors and potentially impacts many industries. Because not all of theproposed legislation can be discussed in this Note, efforts were taken toselect the legislation that currently appears to be the most promising and is

103 George D. Medlock Jr. & David Frist, Joinder: Over a Year After the America

Invents Act, LANDSLIDE Mar.-Apr. 2013, at 44, 44.104 id.105 Id.106 See generally Matt Levy, Patent Progress's Guide to Patent Reform

Legislation, PAT. PROGRESS (Mar. 4, 2014),http://www.patentprogress.org/2014/03/04/patent-progresss-guide-to-patent-reform-legislation; Sid Venkatesan, Examining the Effects of Patent-TrollLegislation on Startups, TECHCRUNCH (Aug. 3, 2013),http://techcrunch.com/201 3/08/03/effects-of-patent-troll-legislation-on-startups/; /.


representative of similar proposals being considered. 10 7 These proposedmeasures fail to adequately solve the TPT problem and adequately balancethe many interests that must be considered when deciding on newlegislation. Many of the proposals, however, speak to some of theindividual underlying issues and propose novel ideas that should beconsidered when crafting a final, comprehensive solution to this problem.Several pieces of proposed legislation will be discussed herein. Thediscussion of each proposal will include an overview of the proposedlanguage and its operation in practice, as well as its strengths andweaknesses.

A. The SHIELD Act-Fee Shifting

The first piece of proposed legislation to examine is the SavingHigh-Tech Innovators from Egregious Legal Disputes Act of 2013, or"SHIELD" Act.108 Introduced by Congressman Peter DeFazio (D-OR) andCongressman Jason Chaffetz (R-UT), 109 this proposed legislation is limitedto computer or software patents, a common technology area for TPTs."0

The SHIELD Act requires a plaintiff to post bond covering attorney's feesbefore trial if the plaintiff is not an original inventor or assignee, did notmake a substantial investment in practicing the invention or is not auniversity."' The proposed legislation then allows the court to award fees ifthere was not a substantial likelihood of success in the case." 2 This processis illustrated in Figure 1 below.

107 Efforts were made to ensure that this Note is up to date between authorship andpublication; however, as the discussion surrounding patent assertion entities is adynamic and hotly contested issue, some statements may be outdated as of the timeof this Note's publication."' H.R. 845, 113th Cong. (1st Sess. 2013).109 Id.; see Tim Wortsall, The Shield Act Tries to Kill the Patent Trolls. But Does ItGo Far Enough?, FORBES (Mar. 1, 2013, 12:16 PM),http://www.forbes.com/sites/timworstall/2013/03/01/the-shield-act-tries-to-kill-the-patent-trolls-but-does-it-go-far-enough/.

Id."1I Christian J. Martinez, SHIELD Act Part 2 and Other Proposals to CombatTrolls, IPWATCHDOG (Jun. 16, 2013, 7:40 AM),http://www.ipwatchdog.com/2013/06/16/shield-act-part-2-and-other-proposals-to-combat-trolls/id=41836/.'

12id.

2014 Patent Trolls-An Overview of Proposed Legislationand a Solution that Benefits Small Businesses and Entrepreneurs

Figure 1: Flow Chart of the SHIELD Law Act 113

The SHIELD Act has its appeal. The SHIELD Act benefitssignificantly from the use of a well-known tool: fee shifting. 1 4 Fee shiftingstatutes have been used, quite influentially and successfully, in many areasand particularly in public interest litigation such as civil rights. Challenginga TPT by attempting to obtain an invalidity or non-infringement declarationfalls under public interest litigation because, as previously mentioned,obtaining a declaratory judgment presents a free rider problem-one personmay bear the entire cost in time and resources to have a patent declaredinvalid or to have a certain practice or technology declared as not infringinga patent, yet the entire class of individuals actually or potentially affectedby the asserted patent(s) gets the benefit of no longer having to worry aboutthe TPT's threats. 5 Such action also inspires confidence in the USPTO aswell as the judicial system by rooting out bad patents and providing judicialrelief to deserving parties. Additionally, the incentive of attorney's feeslowers the barrier to entry by providing an additional incentive for allegedinfringers to litigate the validity of the patent(s), as they may be able torecoup their expenses.

113 id.

115 Id.


Among the greatest weaknesses of the legislation is that itessentially switches the traditional assumption of American legaljurisprudence. American courts typically require each party to "pay theirown way."' 16 In public interest cases such as civil rights, the legislature hasreversed this presumption by permitting the court to award attorney's fees,but only in "exceptional" cases. 1 7 The proposed SHIELD Act, however,goes a step further and requires the court to award attorney's fees if thedefendant prevails, unless the case is exceptional." 8 This is a significantdeparture from traditional American jurisprudence and thus likely faces anuphill battle in becoming law. Rightly so, as this departure will capture agood amount of legitimate patent assertion entities and discourageindividuals from asserting their legitimate intellectual property rights.

Beyond this potential hurdle, there are other weaknesses in theSHIELD Act. First, the proposed legislation attempts to provide a carve outfor other patent assertion entities, but its scope is still too broad and willlikely capture a good number of other patent assertion entities. In essence,the proposed legislation assumes that every party is a TPT, and thenprovides certain exceptions, such as original inventors and universities,rather than beginning with the traditional presumption that the parties arenot TPTs and then providing an exception for TPTs." 9 This presumptioncreates an overly broad scope in which an unacceptable number of otherpatent assertion entities would be forced to incur the burden of a bondbefore trial and toil under the looming presumption of fee shifting. Thiswould certainly be a calculation considered by parties before attempting toassert their patents in litigation and would prevent some parties fromentering litigation. It would also provide unfair settlement negotiationleverage for the non-TPT entities caught in the fee-shifting presumption.Secondly, the fee shifting provision does not solve the underlying problemthat the TPTs often exploit: the fact that the target entities typically do nothave the resources to bring a non-infringement or invalidity suit of greaterthan $2,000,000. Third, this statute could dampen the market for thepurchase of patent portfolios by forcing buyers to take on the added liabilityof such a costly lawsuit in potential attorney's fees to defend the validity oftheir patents, particular considering that the SHIELD Act does not requirethat the TPT sue the user first. A TPT user (individual or entity) of apatented product could challenge a non-TPT patent holder's (individual orentity) patent and with the presumption of awarding fees. This could forcelegitimate patent assertion entity or simple patent owner to pay the suingparties attorney's fees-potentially leading to a type of "reverse trolling."

116 John F. Vargo, The American Rule on Attorney Fee Allocation: The Injured

Person's Access to Justice, 42 AM. U. L. REv. 1567, 1578 (1993).17 Id.118 H.R. 845, 113th Cong. (lst Sess. 2013).ll9 See id.


B. The Patent Abuse Reduction Act/Patent Litigation and InnovationAct of 2013-Requiring Claim Charts and Placing Pleading Hurdlesfor Patent Trolls

The Patent Abuse Reduction Act and the Patent Litigation andInnovation Act of 2013 are two independent bills introduced by SenatorJohn Cornyn (R-TX) and Congressman Hakeem Jeffries (D-NY),respectively.1 20 Both bills are essentially designed to discourage TPTs byrequiring the use of claim charts during pleadings.'21 A claim chart is awell-known tool used in patent law that compares a claim in one patentwith a disclosure in another patent, other piece of prior art or an infringingtechnology. Generally, the bills would require a plaintiff to document thespecific infringement action by the defendant by presenting it against eachclaim of the asserted patent.122 More specifically, the bills require that aplaintiff do the following: identify each patent; claim an accusedinstrumentality, including if known, the name or model number; identifywhere each element of each asserted claim identified is found within theaccused instrumentality; identify whether such element is infringed literallyor under the doctrine of equivalents; and identify how the terms in eachasserted claim correspond to the functionality of the accusedinstrumentality. 123 The bills have other less significant requirements, suchas mandatory joinder of interested parties, and they provide for morelimited discovery (presumably to reduce costs and speed up the litigation)and fee shifting. 124

This legislation seeks to impede TPTs by requiring that theyprovide more tailored information for each pleading. This tailoredinformation makes it more likely that, in order to actually obtain a validinfringement claim past a motion to dismiss or a summary judgment stage,the infringement claims must be realized in the allegedly infringingtechnology. While this can be an added burden on other patent assertionentities, claim charts are well-known tools in patent litigation and theywould likely be crafted in one form or another during litigation, or even as apart of basic pre-suit due diligence, anyhow, in order to prove a case ofinfringement. These two bills seek to limit discovery and provide feeshifting, both of which are designed to ease the burden for defendants tofight TPTs.

120 S. 1013, 133th Cong. (1st Sess. 2013); H.R. 2639, 113th Cong. (1st Sess. 2013).121 Id.; Levy, supra note 106; Stop Patent Trolls. Support the Innovation Act of

2013, ELECTRONIC FRONTIER FOUNDATION,https://action.eff.org/o/9042/p/dia/action3/common/public/?actionKEY=9416 (lastvisited Mar. 31, 2014).122 Levy, supra note 106.123 Id.124 id


These proposed bills fall short from truly fixing the TPT problem ina few ways. TPTs often operate on the "scare tactic" principal by sendingthreatening demand letters and scaring inexperienced and unsophisticatedparties into paying a licensing fee. Unfortunately, this practice would not benecessarily impacted by these pieces of proposed legislation as therequirements are set only for pleadings, not demand letters. It is true thatthe ultimate litigation might be less burdensome, and thus more accessibleto these parties. However, these same parties are unlikely to have either theresources or the inclination to become entangled in prolonged litigationand, in any matter, most TPTs attempt to avoid litigation all together. TheTPTs cast a wide net of threatening letters and rely on a percentage of thosethreatening letters to return a licensing fee. Those that actually do file suitgenerally only do so in the hopes of settlement, rarely taking matter past theinitial pleading stage. Also, like the SHIELD Act, these bills do not solvethe free rider problem whereby one defendant is forced to shoulder theburden and responsibilities of challenging the patent's validity while everyother defendant can free ride off of the defendant's declaratory judgment ifthey are successful.

C. The End Anonymous Patents Act and Transparency Measures

Transparency measures are a class of proposed legislation that seekto improve the visibility of asserting entities like TPTs. This is helpfulbecause transparency devices provide a means for potential defendants andtheir counsel to ascertain whether they are dealing with a TPT or anotherkind of patent assertion entity and formulate an appropriate strategy. Someproposed legislation requires greater transparency in demand letters, whileothers require greater transparency in the patents themselves.1 25 Onerepresentative piece of proposed legislation is the End Anonymous PatentsAct, introduced by Ted Deutch (R-FL).126 This bill requires that issuedpatents disclose the patent owner(s) and the real parties in interest.1 27 Thisinformation is required to be updated throughout the life of the patent.128

This bill likely is the most realistic of any recently proposedlegislation because it is effective and not overly burdensome to any party.The bill only solves part of the problem, however, and is therefore not acomplete solution. While the practice of disclosing the real party in interestis already required by the USPTO, the USPTO lacks a strong enforcement

125 See generally Dennis Crouch, Patent Reform 2013: Demand Letter

Transparency Act of 2013, PATENTLY-O (Nov. 20, 2013),http://www.patentlyo.com/patent/2013/1 1/patent-reform-2013-demand-letter-transparency-act-of-2013.html.126 H.R. 2024, 113th Cong. (1st Sess. 2013).127 id.128 m0


mechanism, and this bill provides it.'29 The bill gives the USPTOrequirement real "teeth" by preventing the award of damages unless theasserting party has established the accurate ownership and real party ininterest. 30 For example, the notorious patent assertion entity, IntellectualVentures, has an estimated 2,000 shell companies, which can makeascertaining the true party in interest difficult, even for sophisticatedparties.1

3 1

Requiring the real party in interest is not an uncommon practice.For example, titles to real property are part of the public record and theirtransfer must be recorded. This not only allows a potential defendant toevaluate the scope of an entity's ownership in a technology area fordetermining whether pursuing a non-infringement or invalidity action isworthwhile, but also serves to bring about a deeper information disclosureduring licensing or intellectual property acquisition transactions. 32 Thisalso allows parties to take proactive steps, such as acquiring patentportfolios in a particular technology area, to help insulate them fromlitigation. 133 This also discourages the practice of "privateering," at least asused nefariously. Privateering refers to companies who hire othercompanies to sue allegedly infringing parties in order to insulate themselvesfrom retaliation.134 Companies who hire other companies to enforce theirpatents will still have to disclose that they are the real party in interest inrelation to the asserted patent. 135 This is helpful because some beneficialnon-practicing entities, such as universities, use these privateers to enforcetheir patents. 36 Thus, this disclosure will only negatively impact those whowish to keep their patent interest secret, such as TPTs.

129 Adi Kamdar, Whose Patent Is It Anyway? A New Bill to End Patent Anonymity,

ELECTRONIC FRONTIER FOUND. (May 20, 2013),https://www.eff.org/deeplinks/2013/05/whose-patent-it-anyway-new-bill-end-patent-anonymity.

id.131 Id.132 John Callaham, Microsoft Supports End Anonymous Patent Act in Congress,NEOWIN (May 17, 2013 11:38 PM), http://www.neowin.net/news/microsoft-supports-end-anonymous-patents-act-bill-in-us-congress.133See id134 Susan Decker, Patent Privateers Sail the Legal Waters Against Apple, Google,BLOOMBERG (Jan. 11, 2013, 12:00 AM), http://www.bloomberg.com/news/2013-01-1 1/patent-privateers-sail-the-legal-waters-against-apple-google.html.135 id.136 See Mark Lemley, Are Universities Patent Trolls?, 18 FORDHAM INTELL. PROP.

MEDIA & ENT. L.J. 611, 618 (2008).One notable example is Eolas Technologies, Inc., v. MicrosoftCorp., in which the University of California licensed a softwarepatent to a company that really does look like a patent troll,however you want to define that term, and then shared with thatcompany a jury award of $520.6 million against Microsoft.

Id. (citation omitted).


Some critics believe that this bill does not go far enough and thatparties will get around the real party in interest requirement by simplygranting exclusive licensing agreements, which are not covered under theproposed legislation, instead of granting outright ownership of a patent.137

Some of these critics argue that the real party in interest requirement shouldbe disclosed even for licensing transactions. 138 Such a requirement,however, would likely be overly burdensome and broad, capturing manyother legitimate patent assertion entities and hampering patent licensingtransactions. Particularly for the small businesses and entrepreneurs whoare arguably the most affected by TPTs, this measure likely falls short ofbeing truly effective because, while it may help them identify a troll, it doesnot solve some of the fundamental problems with invalidity and non-infringement litigation including the significant litigation costs and the free-rider problem.

D. Vermont's New Legislation and State Law Tort Actions

This section is different from the rest for two reasons: first, becauseit is involves a piece of legislation that has actually been enacted; second,because it is the only state law action. This legislation is worth examinationbecause it is a unique and unprecedented solution to the TPT problem thathas seen actual use. Other states have taken other various state actionsbased on existing law, such as consumer fraud or intimidation, but thesehave largely failed to have any significant impact. 39 Vermont has taken upthe matter of TPTs within their state by passing legislation, called the BadFaith Assertions of Patent Infringements, that permits a state tort remedyagainst TPTs.140 This law permits a state law tort cause of action againstparties that the court finds to have asserted their patents in bad faith.41 Thelaw does not give a bright-line rule as to what qualifies as a bad faithassertion; however, some of the most common attributes of TPTs are listedas part of a multi-factor, but neither comprehensive nor determinative, setof considerations for a judge to assess. 14 These factors include asserting

137 Martinez, supra note 111.138 See generally Kamdar, supra note 129.139 See Bruning Enjoined in Patent Troll Case, LINCOLN J. STAR (Jan. 15, 2014,11:00 AM), http://journalstar.com/business/local/bruning-enjoined-in-patent-troll-case/article 7befd879-faa7-57a6-b59d-3e59be4d1888.html. Ohio and other stateshave proposed similar legislation, but so far none have been successfully enacted.See, e.g., Patent Troll Legislation Introduced in Ohio House, OHIO BANKERDIRECT (Ohio Bankers League), Mar. 12, 2013.140 VT. STAT. ANN. tit. 9, §§ 4195-99 (2013); Eric Goldman, Vermont Enacts theNation's First Anti-Patent Trolling Law, FORBES (May 22, 2013, 2:22 PM),http://www.forbes.com/sites/ericgoldman/2013/05/22/vermont-enacts-the-nations-first-anti-patent-trolling-law/; see also Ashby Jones, New York State Cracks Downon 'Patent Trolls', WALL ST. J. (Jan. 13, 2013, 7:05 PM),http://online.wsj.com/news/articles/SB 10001424052702303819704579319071070777820.141 VT. STAT. ANN. tit. 9, §§ 4195-99.142 See id.


meritless claims, demanding an unreasonably short response to the demandand failing to compare the claims to the party's specific technology. 143 Thislaw not only permits private parties to pursue an action, but also permits thestate attorney general to pursue such a claim.144 The statute allows forsignificant compensation including equitable relief, costs (includingattorney's fees), treble damages and $50,000 in exemplary damages. 145

This law is helpful because it gives parties a means to recoup someof the expenses of fighting a TPT. More importantly, it gives the stateattorney general the ability to fight TPTs on behalf of the people of thestate, thereby eliminating the free rider problem-at least at the statelevel-by using public tax dollars to fight a TPT. In fact, Vermont'sattorney general has already utilized this new cause of action in pursuit ofsuch a remedy against one of the largest and notorious patent assertiongroups in recent history, MPHJ Technologies. 146 The complaint has beenfiled and trial is pending. 147

While the enumerated factors used in the Vermont legislation arehelpful for identifying a TPT, when there is money to be made, plaintiffsbecome notoriously crafty in managing to outpace legislation and willlikely find a way to design their business and draft pleadings to avoid thisstate tort action. Additionally, because private parties suffer from a freerider problem due to the high cost of litigation and public benefit of adeclaratory judgment of patent invalidity, this action is likely to be largelylimited to action by the state attorney general. Therefore, this is notcomprehensive because it fails to enable and incentivize individual privateparties to take action against TPTs. Whether this piece of state legislation iseffective or not may not matter. The subject matter of patents is exclusivelyvested in the federal government by the U.S. Constitution, and it istherefore unclear as of now if there will be a federal preemption issue raisedby this legislation.

148

While the proposed and enacted state and federal legislationdiscussed herein contains many novel and useful ideas, it fails tocomprehensively and effectively fix the problems created by TPTs. Thereare many useful ideas that have been proposed that have been borrowed,modified and combined in this Note for Part V to present a comprehensiveand effective solution.

14' See id.144 See id.145 See id.146 Goldman, supra note 140.147 Id. See generally Vermont v. MPHJ Tech. Invs. LLC, No. 282-5-13Wncv (Vt.Sup. Ct. 2012).148 See U.S. CONST. art. I, § 8, cl. 8; Camilla A. Hrdy, What Is Happening in

Vermont: Patent Law Reform from the Bottom Up, PATENTLY-O (May 27, 2013),http://www.patentlyo.com/patent/2013/05/what-is-happening-in-vermont-patent-law-reform-from-the-bottom-up.html.


V. PROPOSED SOLUTIONS BENEFITTING SMALL BUSINESSES ANDENTREPRENEURS

The TPT is the only type of patent assertion entity that causes thekind and degree of economic harm worthy of legislative and judicialreform, as well as private action. TPTs take advantage of the high costs ofpatent litigation and harm the public good by declaring a patent invalid forpersonal gain. TPTs are particularly harmful to small businesses andentrepreneurs, who are the frequent targets of their threats. There are manytypes of patent assertion entities, but the TPTs are the only ones thatrepresent a true threat to, and net drain on, the economy. TPTs takeadvantage of the high costs of contesting claims of infringement andinvalidity litigation coupled with the assertion of poor quality and likelyinvalid patents in order to extract licensing fees on common technology.TPTs take advantage of the lack of resources and experience of parties,often small businesses and entrepreneurs, by trolling a large number ofpotential defendants via threatening letters and demands for license fees andrarely, if ever, actually litigate the infringement claims.

The implementation of the AIA has brought many changes topatent law, some of which are likely to have a long-term adverse impact onTPTs by increasing the quality of patents issued by the USPTO. Inparticular, the addition of inter partes review provides a more thoroughprocess for post-grant challenges to patents as well as an administrativeforum where more complex factual issues may be considered that bearweight on later adjudication. Additionally, legislation has been proposed,and some has been enacted, at both the federal and state levels to combatTPTs. Each of these proposals has its own strengths and weaknesses, but nopiece of legislation represents a comprehensive solution to the TPTproblem. This section seeks to present a comprehensive solution at thefederal level by modifying and combining some of the already proposedideas as well as introducing some unique ideas.

A. Encouraging Transparency by Enhancing the Real Party inInterest Disclosure Requirement and a Callfor Private Sector Action

One flaw in the current system of patent laws that helps to create anenvironment where TPTs thrive is the anonymity of real parties in interest.Potential defendants encounter great difficulty in identifying whether theyare dealing with a TPT or another type of patent assertion entity, like theheat seeking or inside trolls, because the real party in interest is often notidentified. The End Anonymous Patents Act and similar legislation seeks toprovide "teeth" to the mandatory disclosure of the real party in interestrequirement by requiring that the real party in interest be disclosed in order


for a plaintiff to receive damages. 149 This measure also has the benefit ofproviding a public shaming incentive to discourage TPTs, because TPTsoften come under public criticism once they are identified.1 50 The disclosureof the real party in interest requirement is not overly burdensome becausethe law already requires it. This legislation simply provides a strongerenforcement mechanism. Heightened disclosure and transparencyrequirements are a sound way to ensure that the requirement is actuallycarried out.

While some critics state that this law does not go far enough andthat licensing should be included, that requirement would be overlyburdensome, as it would require every licensee or licensor to disclose everylicense agreement with the USPTO. For example, for the popular wordprocessing program, Microsoft Word, Microsoft grants each user a limitedlicense on the use of its patented technology when the software is purchasedand installed. It is easy to see how such a requirement would beburdensome as well as invasive. Some companies, like software companies,would essentially be disclosing their entire client list to the USPTO,presumably for public consumption. However, licensee and licensors arestill covered in limited circumstances. If a licensee or licensor wishes to suefor infringement, they would still have to disclose themselves as the realparty in interest during litigation. This provides adequate protection toparties being sued by licensees or licensors, while balancing the burden andprivacy of end users and legitimate patent assertion entities.

The End Anonymous Patents Act alone, however, is not sufficientto provide the level of transparency needed to allow potential defendants toidentify whether or not a TPT is behind the threats. This is particularly truebecause most TPTs base their business model on not pursuing litigation. Assuch, one of the only ways that a potential defendant has to identify theasserting party is the threatening letter, which often includes a samplecomplaint. Any proposal for transparency should include a provision thatrequires threatening letters and complaints to also identify the real party ininterest in order to collect damages. In this way, a potential defendant cancompare threatening letters to assist them in ascertaining whether they aredealing with a TPT, and collectively, potential defendants across thecountry can determine whether they may be dealing with the same TPT.

The USPTO could be required to provide a database of these lettersas submitted by users to allow potential defendants across the nation to helpidentify if they are dealing with a TPT as well as other potential defendantsbeing targeted. It seems more realistic and efficient, however, that theprivate sector could provide such a service. 51 The service could form a

149 H.R. 2024, 113th Cong. (lst Sess. 2013).150 See, e.g., STOP PROJECT PAPERLESS, Ending Patent Trolling, http://stop-project-

paperless.com (last visited Apr. 6, 2014).1 Some such services have already begun to surface. See, e.g., TROLLING

EFFECTS, https://trollingeffects.org (last visited Apr. 6, 2014). These services have


viable business model for private companies, a valuable draw for dues-paying members of trade or intellectual property organizations, or law firmswho may use such a database as a means of advertising and generatingclients (subject to relevant ethical considerations). This way geographicallydiverse or otherwise unknown and unaffiliated parties may compareinfringement demand letters to determine if they are likely dealing with aTPT, devise a common strategy and ascertain whether they wish to actcohesively in fighting the TPT.

B. Crowdsourced Funding and Establishing Other SimilarMechanisms for Collaborative Action Against TPTs

As alluded to in the previous section, another essential componentof a comprehensive TPT solution is to foster and facilitate collective actionagainst TPTs. As previously noted, TPT victims are generally smallbusiness owners and entrepreneurs who lack the resources to individuallyfight a TPT and also suffer from a free rider problem if they investresources into challenging the infringement claim alone. This is particularlytrue in the matter of challenging the patent's validity because there aregenerally little or no damages to sue for if the patent is declared invalid.Therefore, an individual challenger must risk significant resources with noguarantee of a favorable outcome or way to recoup expenses. Thisdiscourages many individual defendants from litigating against TPTs. Ifthese risks can be sufficiently dispersed over many individual defendants,however, individuals will be more likely to fight TPTs. Risk dispersion is aparticularly effective solution because each individual defendant can benefitequally from the patent being declared invalid. As such, a legislative orjudicial mechanism should be implemented that permits and incentivizesindividual small businesses and entrepreneurs to act collectively. Suchaction would disperse their individual risk when faced with threats from thesame TPT over the same patents or technology. This can be accomplishedin many ways. In particular, a form of crowdsourced funding and privatecollective action groups would provide an efficient solution. Thesemechanisms are well known and require little additional regulatory burden.

An alternative possibility could be to recognize and permit classactions against TPTs for invalidity. However, this solution does not workwell with the traditional model of class actions. Traditional class actionsrequire a financial incentive for attorneys to go out and find a large classwith potential damages distribution per plaintiff, so that the plaintiffsattorney is incentivized to bring in as many plaintiffs as can be joined. In

been recognized and made available to inventors and practitioners by the USPTOthrough their new webpage. See generally Been Sued or Gotten a Demand Letter?Answers to Common Questions About Patent Litigation, USPTO,http://www.uspto.gov/patents/litigation/index.jsp (last modified Feb. 20, 2014, 8:20AM).


the case of TPTs, there is no real financial gain incentive in play, rather it issimply a problem of combining resources for defendants, hence thesuggestion of a crowdfunding solution and private collaborative groups.Crowdsource funding has arisen lately as a popular means for collaborativefunding.'52 Crowdsource funding is "the practice of funding a project orventure by raising many small amounts of money from a large number ofpeople, typically via the Internet."' 153 While primarily a concept andmechanism for enhanced access to investment capital provided by recentfederal securities legislation, a similar mechanism might be organized byprivate groups of individuals, law firms or trade organizations to financecommon defense actions involving TPTs.

By utilizing the proposed transparency mechanism discussed inPart V, the many potential defendants threatened by a TPT may identifyeach other and contribute to a central fund in order to fund a singledefendant's challenge to the patent's validity. If the challenge is successful,all defendants share equally in the benefit of no longer having to pay alicensing fee to the TPT. This method can still suffer from a free riderproblem, however, as the other threatened parties who did not contribute tothe fund benefit from the patent being declared invalid. In order to counterthis weakness, some incentive must be potentially available to theparticipating parties.

This measure does not stop with crowdsource funding of litigation,however. Other sources of private collaborative action could be used,proactively and reactively, to fend off TPTs. Some organizations havealready begun to emerge in technology groups that bring together patentlawyers to devise proactive and defensive strategies. 54 Private collaborativeaction groups, like the aforementioned organizations, could be formed forthe proactive or reactive strategies of acquiring potentially contestablepatents, generating "rainy day" funds for future litigation, or acting as thehosting entity for collaborative action by defendants-gathering threatenedparties, devising a common strategy, selecting a representative party,collecting expenses and managing litigation. 155 Trade associations wouldlikely be ideal vehicles for these collaborative action groups as they arebuilt around a common technology or business and typically already havecommon interests, dues-paying members, experience in managing litigationand in-house counsel or relationships with law firms.

152 Tanya Prive, What Is Crowdfunding and How Does It Benefit the Economy,

FORBES (Nov. 27, 2012, 10:50 AM),http://www.forbes.com/sites/tanyaprive/2012/11/27/what-is-crowdfunding-and-how-does-it-benefit-the-economy/.153 id,

154 Ronnie Cohen, Make Alliances to Fend Off 'Trolls' - Lawyers, REUTERS LEGAL,Dec. 12, 2013."' See id.


C. Fee Shifting and Exemplary Damages-Providing Incentives forPrivate, Collaborative Action Against TPTs

In order to diminish or avoid the free rider problem, incentivesmust be established for potential defendants to get off the bleachers and intothe ring by joining in on collaborative actions. A proposal for combatingTPTs, therefore, should include a provision for fee shifting reasonableattorney's fees and expenses. Fee shifting is a well-known mechanism thatis increasing in popularity. 156 Again, the resources and risks involved withpatent litigation are high and this represents a significant barrier to entry,particularly for small business and entrepreneurs. Traditionally, fee shiftinghas been reserved in the United States to those cases that foster good publicpolicy, and fighting TPTs does exactly that. As mentioned throughout thisNote, TPTs represent a free rider problem, and thus if one defendant (or agroup of defendants acting collaboratively, as discussed in this solution) issuccessful in having the courts declare appropriate patents invalid, they arenot only providing a public benefit for current or future threatened parties,but they are also helping to ensure that good-quality patents are issued bythe USPTO by providing increased judicial scrutiny of issued patents. Assuch, granting reasonable attorney's fees and expenses is warranted. Theseattorney's fees would provide an important compensation incentive formore parties to enter a cohesive agreement to fight the TPT jointly as theyhave the potential to be reimbursed for their expenses along withdistributing their risks.

This incentive, while likely not perfect in attracting all potentialdefendants, strikes a fair balance between encouraging potential defendantsto join an action and being overly-burdensome to other patent assertionentities. 57 This measure also has the advantage of private-orderingflexibility that allows for any type of contribution method to the shareddefense, including standardized contributions, contributions based on thesize of the entity, anonymous and published contributions. Crowdfundingwould also allow large companies and manufacturers who might have aninterest in the matter, but do not want to become embroiled in the litigationpublicly for fear of retaliation or liability, to contribute anonymously in anyamount they desire. In contrast, for those who wish to publicly make astand or believe that supporting collaborative actions grounds would begood publicity, crowdfunding provides a mechanism for them to help out invarying amounts and without the fear of their own liability.

156 See generally Patrick H.J. Hughes, IP Associations Urge High Court to LowerFees Award Standard (U.S.), REUTERS, Dec. 19, 2013, available at2013 WL 76640204.157 Further, to the extent that states or the federal government wish to recognize thepublic benefits that can be realized by successfully challenging TPTs via non-infringement and/or invalidity proceedings, they may choose to provide grantsand/or tax incentives to encourage these actions.


The aforementioned fee-shifting statutes such as the SHIELD Act,however, fall short in some respects. A fee-shifting statute should followthe traditional method of awarding reasonable attorney's fees only inexceptional cases. In the unique patent context, it makes sense to borrowfrom the bad faith test in the Vermont statute. 5 8 Fee shifting should bebased on bad faith factors such as those listed in the Vermont statute, butnot limited to those factors to allow judicial rulemaking, common sense andintrinsic fairness to keep pace with the nefarious ingenuity of TPTs.

Attorney's fees alone, however, may not prove enough toincentivize collective action based on the uncertainty of collection.Therefore, the use of exemplary damages in exceptional cases wouldprovide possible compensation for these risks in order to properlyincentivize potential defendants to challenge TPTs. The use of exemplarydamages is an extreme measure, however, and should only be considered ifthe implementation of attorney's fees and expenses proves to be too weakto adequately incentivize collective or individual action against the TPTs.Should exemplary damages be utilized, they should follow the same multi-factored test described under the Vermont statute and be limited by statuteto the amount found to properly incentivize parties to join collaboratively tosufficiently thwart TPTs. This may be determined academically or by realworld experimentation.

In an example previously mentioned, a TPT was suing smallcompanies for the use of networked printer-scanner-copiers. 5 9 The TPTspecifically stated in its threatening letters that it did not wish to pursue themanufacturers. 160 The TPT likely stated this because it knew that thesemanufacturers had the resources to contest the claim, so no knownmanufacturers became involved.16 1 Under a crowdfunding mechanism,manufacturers who have an interest in proving that they do not produceinfringing technology, but who might not want to contribute directly forfear of liability or lack of funding, could contribute indirectly and inwhatever amount via crowdfunding. This could also be an advantageouspublic relations move for a company. If, on the other hand, the manufactureor parent company did not want to become involved publically for fear ofretaliatory action, they could contribute anonymously via crowdfunding.

As another example, banks, particularly small community banks,have become a frequent target for TPTs based on ATM or softwaretechnologies. 162 These banks could choose to band together via a tradeorganization such as the state bankers league to fight TPTs. Further, aspatents are national in scope, state-level trade organizations couldcoordinate with national trade associations to provide even further risk

158 VT. STAT. ANN. tit. 9, §§ 4195-99 (2013).159 Salzberg, supra note 57.160 See Vermont v. MPHJ Tech. Invs. LLC, No. 282-5-13Wncv (Vt. Sup. Ct. 2012).161 See Salzberg, supra note 57.162 See Finkle, supra note 60.


distribution and a larger base for resource gathering. This would likelymake the cost for an individual defendant to join a collective non-infringement or invalidity defense action much smaller, perhaps even lowerthan the cost of the licensing fee. This lowered cost combined with thepossibility of recouping individual costs of litigation, or even exemplarydamages, would likely make an individual defendant much more likely tojoin a collective action.

It is true that a certain segment of potential defendants will remainunlikely to challenge a TPT, despite available incentives, and opt for justpaying a licensing fee. The proposed measures strike an appropriate balanceof incentivizing and capturing a significant partition of these potentialdefendants while not becoming overly burdensome on other patentassertion entities. In the long term, the presented solution coupled withnatural market actions will incentivize the majority of potential defendantsof TPTs to challenge the validity of the asserted patents and thus reduce thepractice of TPTs. This will have the added benefit of restoring confidencein the USPTO, the judicial system in general and lead to better qualitypatents.

V. CONCLUSION

A key aspect to solving any problem is first identifying the problemitself. The term patent troll is often overused and includes patent assertionentities that protect legitimate business interests and do not generate thesame economic concerns as TPTs. While it is difficult to draw bright-linedistinctions between TPTs and other patent assertion entities, this Notepresents a flexible, multi-factored test based on judicial principals andeconomic factors that tend to indicate a TPT. Vague, ambiguous and likelyinvalid patents are typically the basis of a TPTs' business. The AIA hastaken steps in reducing TPTs' practice by providing helpful mechanisms,like inter partes review, for improving the quality of patents. As TPTs havebeen the target of much high-profile scrutiny recently, and a great deal oflegislation has been proposed to combat their practices. While there aremany useful ideas in the proposed legislation, many of the proposalsoverextend and would capture too many legitimate patent assertion entities,some others under reach, and fail to capture enough TPTs to have asignificant impact. Generally, each piece of legislation only addresses anarrow part of the TPT problem. A piece of comprehensive legislation islacking.

This Note proposes a balanced and comprehensive solution thatcalls on well-known legislative and judicial reform mechanisms oftransparency, crowdsourced funding, fee shifting and possibly exemplarydamages. This solution will beneficially alter the public and private sectorincentives to act against and challenge TPTs. Private sector entities, inparticular, will be incentivized and enabled to act individually and


collaboratively to challenge TPTs. The implementation of this solutionwould lead to the long-term significant reduction in TPTs as well as vagueand ambiguous patents, both of which have significant private and publiccosts. This solution substantially reduces or even eliminates the harmfulTPTs while preserving the social goals of the patent system by protectinglegitimate patent assertion entities.

patent trolls - an overview of proposed legislation and a

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